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Revisiting “Impossibility” as a Contract Defense: It is Not Impossible if There is a Suitable Replacement or Alternative

In general, under California law, “impossibility” is a defense to a breach of contract claim. There are two types of impossibility – legal and factual. A legal impossibility might exist or come into existence by virtue of a change in law. For example, if a business makes a contract with respect to supplies of coffee beans, but then California outlaws the use or consumption of coffee beans, then performance under the supply contract would be legally impossible.

Factual impossibility is when some factual circumstance or event occurs that prevents performance. For example, if all of the sudden, coffee bean supply all over the world die and there is no coffee beans and will never be any ever again. That would be a factual impossibility. A more common example is the destruction of the subject of a contract such as a piece of art. There may be a lawsuit over fault — who is at fault for the destruction of the piece of art — but “impossibility” will be a defense to breach of contract. If money has already been paid over for the art, then the money would need to be returned. The doctrine of impossibility is set out in the California Civil Code, starting with section 1511.

Note that “impossible” does not mean “inconvenient” or “impractical” or “difficult” or “more-expensive-than-originally-thought.” California courts will not consider the hardship or the expense or the loss to the one party or the meagerness or the uselessness of the result to the other. In order to excuse performance, “impossible” means not possible.

“Impossible” also does not exist where there is a suitable replacement. A good example of this comes from a recent case decided in Ohio. Decisions from our sister states sometimes provide interesting examples. The case is Paulozzi v. Parkview Custom Homes, LLC, Case No. 106617, 2018-Ohio-4425 (Ohio App. 8th Dist. November 1, 2018).

That case involved the construction of a residential home. After the house was finished, the homeowner sued the builder for breach of contract and other claims. The building contract contained an arbitration provision that specifically stated that “the arbitration shall be conducted under the auspices of the Ohio Arbitration and Mediation Center in accordance with its rules, at Cleveland, Ohio.” However, when the homeowner attempted to file the arbitration claim against the builder, it turned out that the Ohio Arbitration and Mediation Center was no longer in business.

The homeowner attempted to avoid the obligation to arbitrate based on the doctrine of impossibility. The agreement did not have any language suggesting that an alternative arbitration center could be used. At the trial level, the trial court agreed with the homeowner. Since the specific arbitration center listed in the contract no longer existed, it was impossible for either party to perform. The court absolved the homeowner of the obligation to arbitrate.

However, the Ohio Court of Appeals reversed. Rather than focusing on impossibility, the Court of Appeals focused on the intent of the parties. Their intent was to arbitrate. Since other arbitration centers were available (or could be appointed), requiring arbitration in an equivalent manner was consistent with the intent of the parties. For the court, there was a suitable replacement that could effectuate the intent of the parties. The Court of Appeals also noted that the contract had severability clause which allowed parts of the contract to be severed without impacting the remainder of the agreement. The court noted that the clause concerning the specific arbitration center could be severed while the remainder of the arbitration provision could be left in place. This was an additional reason to hold that arbitration could be ordered that would be equivalent to what was required in the contract.

Contact San Diego Corporate Law

For further information, please contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has the experience to draft your contracts properly and can provide advice in the event of a breach. San Diego Corporate Law can provide legal services for any business-related matter. Mr. Leonard can be reached via email or by calling (858) 483-9200.

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Michael J. Leonard, Esq., is an award winning attorney whose practice focuses on corporate, securities, contract, and intellectual property law for small and medium businesses. In his practice, Mr. Leonard routinely assists his clients with the formation of business entities, financing through the sale of debt and equity securities, mergers and acquisitions, contract drafting and review including commercial leases, and establishment and licensing of trademarks, copyrights, and trade secrets.